10/02/2015

MD Banking and finance

Dept. of Economics and Statistics

FINANCIAL INTERMEDIARIES,
FINANCIAL STATEMENTS AND
SUPERVISION

OVERVIEW OF IAS/IFRS
PRINCIPLES

A.Y. 2014/2015
Dr. Alberto Dreassi
alberto.dreassi@uniud.it

AGENDA
Scope, genesis and main contents
Differences with national GAAP
Overarching principles, conditions and
presentation of financial information

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OVERVIEW
European revolution: Regulation 1606/2002/EU
immediately in force in all EU countries
reference to IAS/IFRS principles and their interpretation
(SIC/IFRIC) due to an external private body (IASB)
gradual recognition of new principles and amendments:
enforcement: limited, detailing timing and firms
endorsement: deep evaluation and potential amendment of
principles
compulsory:
from 2005 for issuers of securities traded in an European
regulated market
from 2006 for consolidated accounts of banks and insurers
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in Italy: also for individual accounts of banks

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OVERVIEW
The European process
IASC Foundation
IASB
International Accounting
Standards Board

Principles
- Convergence
-

Agenda
Project
Discussion paper
Exposure draft
Standard
Revision

EU
Technical body

Political body

IFRIC
International Financial
Reporting Interpretations
Commitee

SAC

Trustees

Neutralityobjectivity of
EFRAG
-

Consultation

Standards Advisory
Committee

Administration
Steering

ARC
Accounting Regulatory
Committee

Interpretation
- Application
- Extension
-

EFRAG
European Financial
Reporting Advisory Group

Homologation
Approval
Enforcement
Revision

SARG
Standards Advice Review
Group

Commission
Council of Min.

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IAS/IFRS IN FORCE TO DATE

Principle Topic
IAS 1
Presentation of Financial Statements
Inventories
IAS 2
IAS 7
Statement of Cash Flows
Accounting Policies, Changes in Accounting Estimates and Errors
IAS 8
IAS 10
Events After the Reporting Period
Construction Contracts
IAS 11
IAS 12
Income Taxes
IAS 16
Property, Plant and Equipment
IAS 17
Leases
Revenue
IAS 18
IAS 19
Employee Benefits
IAS 20
Accounting for Government Grants and Disclosure of Government Assistance
The Effects of Changes in Foreign Exchange Rates
IAS 21
IAS 23
Borrowing Costs
Related Party Disclosures
IAS 24
IAS 26
Accounting and Reporting by Retirement Benefit Plans
Separate Financial Statements
IAS 27
IAS 28
Investments in Associates and Joint Ventures
Financial Reporting in Hyperinflationary Economies
IAS 29
IAS 32
Financial Instruments: Presentation
Earnings Per Share
IAS 33
IAS 34
Interim Financial Reporting
Impairment of Assets
IAS 36
IAS 37
Provisions, Contingent Liabilities and Contingent Assets
IAS 38
Intangible Assets
Financial Instruments: Recognition and Measurement
IAS 39
IAS 40
Investment Property
IAS 41
Agriculture

Date
This course
2007*
~
2005*
1992
V
2003
2003
1993
1996*
2003*
~
2003*
1993*
~
2011*
1983
2003*
2007*
2009*
1987
2011*
~
2011*
~
1989
2003*
V
2003*
1998
2004*
V
1998
~
2004*
2003*
V
2003*
~
2001

5
V full coverage

~ partial coverage

* revised

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IAS/IFRS IN FORCE TO DATE

Principle
IFRS 1
IFRS 2
IFRS 3
IFRS 4
IFRS 5
IFRS 6
IFRS 7
IFRS 8
IFRS 9
IFRS 10
IFRS 11
IFRS 12
IFRS 13
IFRS 14
IFRS 15
IFRS for
SMEs

Topic
Preface to International Financial Reporting Standards
First-time Adoption of International Financial Standards
Share-based Payment
Business Combinations
Insurance Contracts
Non-current Assets Held for Sale and Discontinued Operations
Exploration for and Evaluation of Mineral Assets
Financial Instruments: Disclosures
Operating Segments
Financial Instruments
Consolidated Financial Statements
Joint Arrangements
Disclosure of Interests in Other Entities
Fair Value Measurement
Regulatory Deferral Accounts
Revenue from Contracts with Customers

Date
This course
2002*
~
2008*
V
2004
2008*
~
2004
V
2004
2004
2005
V
2006
~
2013*
V
2011
V
2011
~
2011
~
2011
~
2014
2014
2009

IFRS for Small and Medium-Sized Entities

Other documents
Conceptual framework Technical summary
21 IFRIC (IFRS interpretations)
31 SIC (IAS interpretations)
Exposure drafts, Discussion documents, Comment letters, Revisions, Amendments,

Date
This course
2012*
~
2004-2013
~
1997-2001
~
~

6
V full coverage

~ partial coverage

* revised

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DIFFERENCES FROM NATIONAL GAAPS

Several differences:
documents:
CFS is mandatory
OCI (other comprehensive income) and SCE (statement of changes
in equity) are new mandatory documents
BS and IS shorter, Notes significantly extended

financial statements:
schemes are not provided (usually from supervisors)
BS: distinction between short-term and long-term assets/liabilities
or liquidity criterion
IS: distinction between nature or function of revenues and costs
CFS: either direct or indirect
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DIFFERENCES FROM NATIONAL GAAPS

Several differences:
disclosures:
tentative association entry-principle failed
prepayments and accruals within receivables/payables
capital gains at inception within securities values
own shares and receivables from shareholders in equity
no explicit off-balance sheet statement (information within Notes)
distinction of non-current assets/liabilities available for sale, but no
extraordinary/non-operating revenues/expenses
liquidity includes cash and equivalents (bank overdrafts and money
market securities with maturity shorter than 3 months)

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DIFFERENCES FROM NATIONAL GAAPS

Several differences:
measurement principles:
extended market (fair) evaluation, historical cost often adjusted
retrospective application/reconciliation on first-time adoption
errors, revisions, changes in principles require reconciliation on
past figures
recognition of revenues separated from contractual/legal bindings:
risk transfer, benefits and control
interests (and equivalents) require the principle of competence but
through the effective interest rate
employee benefits: require measurement through actuarial
estimates
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DIFFERENCES FROM NATIONAL GAAPS

Several differences:
specific entries:
intangibles: stricter rules for recognition and amortisation
tangibles: measurement options include historical cost, market
(fair) value, revaluation cost
impairment test on PV of future cashflows for asset deterioration
inventories: no LIFO
financial assets/liabilities: measurement depends on companys
strategy, not on contractual features (amortised cost and fair value,
instead of impaired cost or the lower between cost and market value)
leasing treated similarly to loans
hybrid securities: separation between capital and debt
derivatives: hedging (strict rules) or trading (fair valued)
instead of off-balance sheet

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IAS/IFRS FRAMEWORK
Objective: useful financial information to take economic decisions (investors perspective)
Going-concern
Competence

Hypothesis

Relevance

Economic accrual
Definition of A/L/E/R/C

Faithful representation

Qualitative characteristics

Materiality

Completeness
Neutrality
Freedom from error

Understandability

Timeliness

Make a difference in decisions

Predictive and confirmatory values

Verifiability

Comparability

Represent through figures and words

the economic and financial reality

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IAS/IFRS FRAMEWORK
Definitions:
asset:
a resource controlled by the entity as a result of past events
from which future economic benefits are expected to inflow
liability:
a present obligation of the entity arising from past events
the settlement is expected to result in an outflow of resources
embodying economic benefits
equity:
residual interest in the assets of an entity after the deduction of all
liabilities

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IAS/IFRS FRAMEWORK
Definitions:
income:
increases in economic benefits during the accounting period
through inflows or enhancements of assets or decreases of liabilities
that result in increases in equity, other than contributions from
equity participants
expense:
decreases in economic benefits during the accounting period
through outflows or depletions of assets or incurrences of liabilities
that result in decreases in equity, other than distributions to equity
participants
recognition:
when it is probable that benefits will inflow/outflow
if measurement is reliable
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IAS/IFRS FRAMEWORK
The fiction of periodic reporting requires measurement principles:
estimates based on reasonable hypothesis about the future
to identify value and performance of operations
different methodological approaches are available:
historical cost: original CF of a transaction
present value: discount of future CF through a risk-based IR
amortised cost: value and performance depend on the IRR
realisable value: estimate of the potential CF obtainable or
payable (also on the primary market)
market value: CF from selling/purchase on the secondary market,
net of transaction costs
fair value: main principle (but with exceptions) not necessarily
corresponding to a market value (f.i. modeling)

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EVALUATION ISSUES
Why different methodologies?
Example
You bought on 2010 a piece of land (1.000 m2) for 100.000 and incurring transaction
costs for 5.000. In 2011 you have the following measurement alternatives:
the cost of a similar piece of land is 120.000
you could sell your property for 140.000, incurring costs for 10.000
the real-estate market in your area shows an average price for land of 97/ m2
if leased, your land could earn 5.500/year and a reasonable risk-based rate is 5%

Evaluation:
historical: 105k - no income/expenses (temporarily significant)
replacement: 120k - 15k gain (updates its cost)
realisation: 130k - 25k gain (reflects your skills)
market: 97k - 8k loss (not case-specific)
PV: 110k - 5k gain (hypothetical and uncertain)

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FAIR VALUE
Based on exit price: market-based and not entity-specific
The price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date
Requires an active market: transactions take place with sufficient
frequency and volume to provide ongoing pricing information
Reference is made to the principal market (greatest volumes/activity)
Disclosures require hierarchy (the lower the level the higher the
amount of information required):
Level 1: quoted prices in active markets for identical A/L
Level 2: quoted prices for similar A/L in active markets, for
identical A/L in non-active markets, other observable inputs (interest
rates, yield curves, credit spreads, )
Level 3: unobservable inputs, including own data and using robust
models (PV, option theory, ), or cost if unreliable
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FAIR VALUE
When valuation techniques are required:
observable inputs should be maximised, unobservables minimised
alternatives:
market approach: prices and other information generated by
market transactions that are identical or comparable (prices, market
multiples for shares, etc.)
cost approach: current replacement cost for the service capacity of
an asset
income approach: future amounts (CF, income and expenses)
discounted to a single market expectation (DCF, dividend discount for
shares, etc.)
multiple approaches: f.i. net asset value in business combinations

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